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Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#141 - Stock Indexes


Stock Indexes

It is not uncommon for financial professionals (myself included) to use financial lingo that is common place in the financial world, but may not be familiar to those in a non-financial world. One term that is frequently used is “the S&P.” So what is “the S&P?”


The S&P refers to Standard & Poor’s 500 Index that tracks about 500 of the top companies in the United States. In other words, when someone references the S&P they are not including a significant portion of the stock market (namely smaller US companies and international companies).


Another commonly referenced index is the Dow Jones Industrial Average. This index is even more restrictive as it only tracks 30 of the larger companies in the United States.


The Nasdaq Composite Index is a popular index as well. This index does include some international stocks but is more tech-focused.


The S&P, Dow, and Nasdaq are the three most popular indexes but you can see they are somewhat limited in what they track. FTSE Global All Cap Index would be a more broad-based index but it how is not used as much.


Indexes are important as they give us a less biased look at if the general stock market is up or down. They also simplify developing broad passive-based investment products. It is important to recognize their limitations though. While there are about 5,000 U.S. Indexes alone, no index completely encompasses all possible investments.


Much of the above information was referenced in the below Investopedia article.

 

Interesting Articles/Videos Investopedia - An Introduction to U.S. Stock Market Indexes

  • Overview of common U.S. indexes.

  • Excellent article on buying individual stocks vs. diversification.

A Wealth of Common Sense - On the Inevitability of Bear Markets

  • While we don’t know for sure what the future holds, investment downturns typically lead to positive investment performance (especially over the long term).

 

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